Hot Takes

The OCC has just taken another step toward a national fintech charter.

Today it released a draft of the licensing manual supplement that will be used by fintech companies digital currency and blockchain companies among them to understand and engage in the process of becoming a chartered special purpose national bank (often called a Fintech Charter).

The draft manual echos and clarifies previous statements from the OCC specifying that they have legal authority to charter a company that merely provides access to a payment system (even if it doesn't take deposits or make loans). The draft manual reads:

a special purpose national bank that conducts activities other than fiduciary activities must conduct at least one of the following three core banking activities: taking deposits, paying checks, or lending money.

And then, as we've asked for in previous letters, it goes on to elaborate on what paying checks means in the modern world:

issuing debit cards or engaging in other means of facilitating payments electronically may be considered the modern equivalent of paying checks.

The draft manual also delves into a topic we focused on in our most recent comment letter: under existing interpretation and law is there a broad category of bank-permissible activities which could be used to describe the range of activities in which digital currency companies engage? The OCC helpfully points a perspective applicant in the right direction through a succession of footnote references to past interpretations (the same past laws and interpretations we described in our most recent comment). These include:

buying and selling exchange, coin, and bullion [12 USC 24]

which is one possible route for appraising the purchase or sale of digital currency to customers as a bank-permissible activity. The manual also describes:

establishing and operating a messenger service (12 CFR 7.1012), acting as a finder (12 CFR 7.1002)

which is a pretty good description of running a full node or a lightning node. It also cites:

acting as a finder (12 CFR 7.1002),

which is what a digital currency exchange is doing when it connects buyers and sellers on their platform. It also cites:

producing and selling software that performs a service the bank could perform directly (12 CFR 7.5006).

which is a great match for hosted wallet design and services, e.g. a high tech version of safekeeping activities banks have provided for centuries in the form of safe deposit boxes and other custodial services.

We're thrilled that the OCC is making this process as transparent as possible, and even doing a bit of hand-holding to help innovators (who are better versed in bits than bonds) understand and navigate the chartering process.

If you’d like to read more about how a charter may be relevant to digital currency companies take a look at our most recent letter to the OCC. And look out for our next comment! Even though licensing manuals are not usually subject to a public comment process, the OCC has asked for continued feedback from the community.

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A token airdrop may not spare you from securities regulation.

Blockchain token based projects need network effects. There needs to be a mechanism for fairly and widely distributing tokens to in order for the project to function well upon launch. A popular method thus far has been to sell those tokens in advance to prospective users of the network that are interested in crowdfunding its development. Another, lesser known, strategy is an “airdrop.”

In an airdrop, a project’s creators can take a snapshot of a public blockchain, such as Bitcoin’s or Ethereum’s, and send tokens to all wallet addresses containing some number of bitcoin or ether at the time the snapshot was taken. This requires no action on the recipient's part other than to take whatever steps are needed to take control of the tokens once they have been gifted. It can be a way to jumpstart a community by instantly putting tokens in the hands of a lot of people with a proven level of cryptocurrency savvy.

This seems like something totally new and unique to token projects, right? Not really. It turns out people have tried airdropping before, but with stocks. And the SEC did not look favorably upon the tactic. See this 1999 press release:

In each of the four cases, the investors were required to sign up with the issuers' web sites and disclose valuable personal information in order to obtain shares. Free stock recipients were also offered extra shares, in some cases, for soliciting additional investors or, in other cases, for linking their own websites to those of an issuer or purchasing services offered through an issuer. Through these techniques, issuers received value by spawning a fledgling public market for their shares, increasing their business, creating publicity, increasing traffic to their websites, and, in two cases, generating possible interest in projected public offerings.

So, since the SEC has found that some tokens can be securities, if you are considering using an airdrop token distribution be warned that even giving away tokens is not necessarily free from scrutiny under securities law.

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Use cryptocurrency to help victims of Mexico earthquake.

By now you have heard of the devastation that an earthquake measuring 7.1 on the Richter Scale has caused in Mexico City and the surrounding areas. The death toll has reached over 200 and is climbing.

Mexican cryptocurrency exchange Bitso is raising funds to aid the relief effort. Bitso will be donating the funds to the Red Cross and Brigada de Rescate Topos Tlaltelolco A.C., a local earthquake relief organization. You can support this cause by sending cryptocurrencies to the addresses below.

Bitcoin (BTC) 1DaHfXsoPfZ2jznJhB62vR3QEVFhhZ2tMR

Ethereum (ETH) 0x88B6021aE4BB9830f2E9D5BB38B83427b9D7ffEc

Ripple (XRP) rEFMdiTbLmZq5ZiMGrWGoyP48DMFqXjNkM [No Destination Tag required]

You can learn more about this effort on Bitso’s blog.

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What are the tax implications of Bitcoin’s big fork?

A new report [PDF] from Deloitte may have some answers.

On August 1, 2017, Bitcoin block 478558 was mined. At that moment, the Bitcoin network split into two similar but incompatible versions: the original Bitcoin and a new network called “Bitcoin Cash.” Every existing holder of Bitcoin private keys now had control of tokens on both networks that could be moved and traded independently of each other. It turned out that the new Bitcoin Cash tokens have considerable value too. So what are the tax implications of this? The report lays out some ideas:

The Bitcoin chain-split has no obvious analogy for federal income tax purposes; however, whether or not it is a realization event, the chain-split has basis effects. While the conclusion may not be certain, the following can be said: There was no exchange of bitcoin for bitcoin cash; and, the receipt of bitcoin cash was a consequence of holding bitcoin.

An owner of bitcoin is entitled to bitcoin cash merely on the basis of his ownership. As a result, he may be treated as realizing ordinary income to the extent of the value of bitcoin cash. The value is normally determined on the date of actual or constructive receipt. Bitcoin cash was actively trading over-the-counter within hours of the chain-split. If it was a realization event, then the basis of bitcoin cash would be equal to the ordinary income actually recognized, and gain or loss on the disposition of bitcoin cash would be determined using that basis. Alternatively, it might be argued that the chain-split was similar to a property division. In that case, the basis in each bitcoin would be allocated between it and the related bitcoin cash.

The full report is a deep dive into the taxation of virtual currencies. You can access it here [PDF].

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Steptoe is putting on a Bitcoin tax event in DC.

Coin Center has partnered with law firm Steptoe & Johnson to put on a half-day workshop focused on the tax issues that blockchain technologies raise.

The program will feature a presentation on blockchain technology by Jonathan Johnson, President of Medici Ventures and Chairman of Overstock.com, as well as presentations and panels on legislative and regulatory developments, including the work of the Congressional Blockchain Caucus. The program will also include discussions about tax compliance and structuring investments.

Click here to register.

Event details:

Tuesday, September 12, 2017

11:30 a.m. - 6:00 p.m.

11:30 a.m. - 12:00 p.m. - Registration

12:00 p.m. - 4:30 p.m. - Lunch and Program

4:30 p.m. - 6:00 p.m. - Cocktail Reception and Networking

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New digital currency bill in Congress? Here’s the real (crazy) scoop.

An article in the Daily Caller claims that some in Congress are considering a digital currency bill, but the story is based on anonymous sources and has very few specifics. It seems related to something we’ve been tracking for a while and I wanted to share some details in the hope that folks won’t be confused if this “story” gets more traction.

The article says that unnamed members of Congress are supposedly “looking at the compliant capabilities of AML Bitcoin, which is a compliant digital currency.” We’ll return to that odd phrasing in a minute, but first we’ll note that “AML Bitcoin” is a product and a company formerly called AtenCoin. On its website, “AML Bitcoin” also describes itself as a “compliant digital currency.” It’s hard to characterize what exactly is “AML Bitcoin,” so I invite you to take a look at their site and decide for yourself. To be clear, though, AML Bitcoin has nothing to do with Bitcoin and, from what we can tell, it’s a small altcoin project.

Now, here’s the fun twist. “AML Bitcoin” has recently teamed up with disgraced former lobbyist Jack Abramoff, who served time in federal prison for fraud, corruption, and conspiracy, to produce a reality TV show about lobbying Congress on digital currency. (Why can’t it ever be a dull day in this space?) As the Washington Post notes, “[t]he show will follow Abramoff as he leads a group from a cryptocurrency firm AML Bitcoin in a ‘boot camp’ that will transform the members ‘from techies to lobbyists ready to take on Capitol Hill,’ per the show’s creators.” Unfortunately, the headline for that Post article is, “Disgraced ex-lobbyist Jack Abramoff to train bitcoin activists in new reality TV show,” which leads people to think Abramoff is associated with Bitcoin and not “AML Bitcoin.” Here is another article on Abramoff’s tie-up with “AML Bitcoin.”

Now, as far as the bill that members of Congress are supposedly considering, we’ve seen a document floating around the Hill that may be the supposed bill in question. It is an unofficial and inexpert draft of a bill that, if it were taken seriously, would be very dangerous for cryptocurrencies. It’s hard to interpret because it is quote poorly drafted, but essentially it would sort digital currencies into two categories: “anonymous digital currency” and “compliant digital currency,” and then places AML requirements on merchants who accept digital currencies unless they use a “compliant digital currency.” It also has a "Possession Requirement" that requires merchants to "confirm that digital currency has been in possession of purchaser for at least 30 days[.]" Again, it’s hard to interpret the document because its drafting is bizarre and would create many unintended consequences.

We’re fairly certain that folks on Capitol Hill will see through all this, but we still think it's important to highlight these details. What folks in Congress and journalists may not know is the distinction between Bitcoin and AML Bitcoin, and they may not know about the Abramoff reality TV show. We hope they'll be careful as they look into any notional digital currency bills.

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Save the Date: The 2018 Coin Center Annual Dinner with be on May 14, 2018.

The Blockchain community’s night out is coming back to New York City during Consensus 2018. We hope you will join us once again to rub shoulders with some of the best and brightest in the industry, all while supporting Coin Center’s critical policy advocacy mission.

Monday, May 14, 2018 - 7:00 PM

The Plaza Hotel

768 5th Avenue, New York, NY 10019

Tickets will be on sale in early 2018. For sponsorship information please contact antonie@coincenter.org.

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The SEC today has said that some tokens can be securities.

That comports with the analysis of securities laws and crypto-tokens we issued two years ago. What the SEC did not say is that all tokens are securities. Rather, they suggest a facts and circumstances test but only analyze the facts and circumstances surrounding last year’s DAO token sale.

We believe that applying the same facts and circumstances test to other tokens will mean that some do not fit into the definition of securities, particularly tokens with an underlying utility rather than a mere speculative investment value. Our securities framework and other research explains why this is the case. We hope clear guidance from the SEC to that effect will be forthcoming.

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Based in Washington, D.C., Coin Center is the leading non-profit research and advocacy center focused on the public policy issues facing cryptocurrency and decentralized computing technologies like Bitcoin and Ethereum. Our mission is to build a better understanding of these technologies and to promote a regulatory climate that preserves the freedom to innovate using permisionless blockchain technologies.